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This model is a reminder to cut your losses and focus on future opportunities rather than getting pulled down by past decisions.
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- Ask, ‘does this cost have an impact on what will happen in the future?’
Identify Sunk Co ... Lorem ipsum dolor sit amet, consectetur adipiscing elit. Habes, inquam, Cato, formam eorum, de quibus loquor, philosophorum. Nam quibus rebus efficiuntur voluptates, eae non sunt in potestate sapientis. At ille pellit, qui permulcet sensum voluptate. Quae duo sunt, unum facit. Nummus in Croesi divitiis obscuratur, pars est tamen divitiarum. Itaque si aut requietem natura non quaereret aut eam posset alia quadam ratione consequi. Sextilio Rufo, cum is rem ad amicos ita deferret, se esse heredem Q. Duo Reges: constructio interrete. Quid dubitas igitur mutare principia naturae? Utilitatis causa amicitia est quaesita. Ut optime, secundum naturam affectum esse possit. At ego quem huic anteponam non audeo dicere; Idcirco enim non desideraret, quia, quod dolore caret, id in voluptate est. Expressa vero in iis aetatibus, quae iam confirmatae sunt. His similes sunt omnes, qui virtuti student levantur vitiis, levantur erroribus, nisi forte censes Ti. Servari enim iustitia nisi a forti viro, nisi a sapiente non potest. At iam decimum annum in spelunca iacet. Sed eum qui audiebant, quoad poterant, defendebant sententiam suam. Quid enim necesse est, tamquam meretricem in matronarum coetum, sic voluptatem in virtutum concilium adducere? Scientiam pollicentur, quam non erat mirum sapientiae cupido patria esse cariorem. Dici enim nihil potest verius.
Identifying a Sunk Cost can be difficult when there is no precise way of comparing a loss to a gain. The desire to not appear wasteful also can limit your ability to base a decision on relevant costs exclusively, especially when you feel personally responsible for the investments representing sunk costs.
The Concorde Fallacy.
The Concorde Fallacy is an alternative name for the sunk cost fallacy, coming from the way the British and French governments continued to co-fund the development of the expensive Concorde supersonic aeroplane even after it became financially untenable. Their previous investment, financially and politically, was thought to determine the ongoing funding.
Eat too much?
A common example of the sunk cost fallacy is when someone buys a large meal, then overeats to ensure ‘they get their money worth’.
The sunk cost fallacy is an unconscious bias that arises from accounting and financial domains. It is an important consideration in decision making.
Use the following examples of connected and complementary models to weave the sunk cost fallacy into your broader latticework of mental models. Alternatively, discover your own connections by exploring the category list above.
Connected models:
- Cost-benefit analysis: to consider actual pros and cons of a choice
- Opportunity cost: to consider the potential loss of a future facing decision.
Complementary models:
- First principle thinking: in breaking down a situation to its basics.
- Inversion: considering the opposite, e.g. ‘how can we continue to make that loss again?’
- The Lindy effect: to challenge sunk costs and seeing past longevity as a potential positive.
- Availability heuristic: being overly impacted by immediate situations and losses.
- Lock-in effect: is there greater friction to breaking from the status quo.
Read N. Gregory Mankiw’s Principles of economics for information on various economic theories that involve the concept of sunk costs.
This brief article references some of the relevant studies arising from Behaviorual Economics and the Sunk Cost fallacy. Check this video resource for a quick overview of the sunk cost concept and how it applies to the Concorde supersonic plane case.
My Notes
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